An appraisal is one of the steps in the homebuying process that homebuyers are often most worried about – and with good reason. A low appraisal during the homebuying process could put your mortgage offer in jeopardy. A similar process is usually required for a refinance and for various loan products, like conventional loans, FHA loans and VA loans. What happens after an appraisal depends on what the appraisal report says.
What's After the Appraisal?
It's necessary to look at the mortgage underwriting process more broadly so you can see how an appraisal fits into the bigger picture. The mortgage application process and closing process usually follow a set sequence:
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- Preapproval, where the homebuyer completes a loan application with credit score and income information. A home inspection and touring the property with your real estate agent typically also fall into this portion of the mortgage application process.
- Purchase agreement, where the buyer and seller agree to a sale price and sign a contract.
- Home appraisal process, where a professional appraiser inspects the home and determines how much the property is worth.
- Mortgage underwriting, where the buyer submits paperwork and the loan officer and underwriter decide whether the bank will go ahead with the loan.
- Underwriting conditions, where the underwriter calls for more documents or asks the buyer to satisfy certain conditions before the loan process is finalized. A title search through a title company may be conducted for most home loans, and proof of homeowner's insurance is typically required.
- Closing date, where money changes hands, closing costs are paid, closing disclosures and the deed get signed, escrow is set up (if applicable) and the buyer gets finalized loan documents and the keys to the home. The home purchase process is complete.
Purpose of Mortgage Underwriting
The next step after an appraisal is mortgage underwriting. The purpose of underwriting is to establish whether the bank wants to make a mortgage loan to the borrower based on their risk level (how likely it is that the borrower will default on the loan). For instance, the underwriter will look at the borrower's credit report, debt load, collections history and so on.
An appraisal is an opinion of the value of the home given by a licensed appraiser. Mortgage lenders insist on them for their underwriter to review, but cash buyers often get their own appraisal. According to HomeLight, an appraisal may take about two weeks.
What Are LTVs?
During the appraisal process, banks consider the loan-to-value ratio, which is the ratio between the value of the loan the borrower is taking out and the value of the property as a whole. LTVs are important to underwriting because lenders will have a maximum LTV that they are prepared to approve. If you have the resources to make a large down payment, then you're going to have a lower LTV.
As a general rule, the higher the LTV, the higher the risk that the lender will lose money if it has to foreclose. High LTVs translate into higher interest rates to reflect the lender's risk. On the flip side, a loan with a lower LTV is less of a risk to the lender.
Tying It All Together
What does this mean for homebuyers on the ground during the appraisal process?
- If the appraisal comes in at or above the contract price, then the transaction will proceed as planned (assuming there are no other issues with the mortgage underwriting).
- If the appraisal comes in below the contract price, you have some negotiation to do. As a buyer, you have the upper hand, as you can often persuade the seller to lower the price.
Remember that you may not have to negotiate the price down to the appraised value, and you could meet the seller in the middle. You can pay more than the appraised value if you really want the home. The key is to get the LTV to an acceptable level so the bank approves the loan. Note that a home appraisal is not the same as a home inspection; you will need to do both, explains Rocket Mortgage.